It’s clear that Bank of America (NYSE:BAC) is moving aggressively to minimize its risks. At the moment, those efforts have done little to boost Bank of America stock, however. BAC stock sits at an 11-month low, having dropped over 20% from March highs.
What matters for investors, of course, is what happens going forward, not backward. And BAC stock still has a bright future. Despite the sell-off, I continue to be bullish on Bank of America stock. I’ve even recommended it as a stock to give your grandchildren.
That said, BofA’s risk efforts provide an interesting wrinkle in terms of analyzing the stock. And at a time where financials across the board look relatively attractive, they do mean that more aggressive investors might be looking for a more aggressive bank.
BofA’s Risk Management
Bank of America acquired subprime lender Countrywide Financial in 2008, a deal that quite likely was the worst financial services acquisition in history. During the worst of the financial crisis, it took over Merrill Lynch.
Like so many peers, it’s spent the last decade seemingly trying to get out from under the liabilities and fines resulting from pre-crisis behavior; at BofA itself, but mostly at the two acquired businesses.
BofA largely has done so. And clearly, it’s not going back. Last year, a $1 billion-plus margin loan to Steinhoff (OTCMKTS:STHHF) chairman Christo Wiese went south as an accounting scandal sent the stock plunging. A number of Wall Street banks including BofA, Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM), took nine-figure losses.
Some of those banks reassessed their practices as a result. Barclays (NYSE:BCS) reportedly saw the collapse as an opportunity, and ramped up its margin lending business. BofA went the other way, as Bloomberg reported.
The firm “got gun-shy” and “began an intense internal investigation.” The company’s head of investment banking, Christian Meissner, departed, with the Financial Times (as Bloomberg’s Matt Levinepointed out) citing Meissner’s frustration with the conservative risk profile of the bank.
And the shift matters to investors and analysts. The first question on BofA’s Q3 conference call this month addressed the company’s “lack of risk appetite.”
CFO Paul Donofrio said in response: “We are staying focused on responsible growth. We’re not chasing the market.” As a result, the investment banking business lost share in the quarter, with firm-wide investment banking fees down 18% year-over-year.
The conservative risk management isn’t limited to investment banking, either. Across the board, risk metrics have come down, with credit loss provisions improving in both the consumer and global banking businesses. Bank of America is being cautious.
Is Cautious the Right Move for BAC Stock?
That cautiousness from a short-term standpoint, would seem to be a brilliant move at the moment. This after all, clearly is a cautious market, given selling pressure in sectors like semiconductors and cyclical stocks. But it’s done nothing for Bank of America stock, which has headed quickly south along with other big banks.
In fact, BAC stock actually has underperformed other big banks. And that narrows the bull case for BAC somewhat. For an investor who sees the bank sector as overly punished, BofA’s conservatism means Bank of America stock might not be the right play.
JPMorgan Chase should be able to take share in investment banking. Citigroup’s turnaround would benefit from further strength in the sector (and higher interest rates). Wells Fargo (NYSE:WFC) can finally get past its scandals. Barclays just posted a big quarter, and Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) could benefit from Merrill Lynch’s pulling back from key deals.
The catch for BAC stock right now is that the thesis for financial stocks on the whole is that the sell-off has gone too far. Nervous investors are overestimating the risks (whether macro pressure or fewer/lower interest rate hikes) to the sector.
But if that’s the thesis, the play is to buy the banks with more risks, not fewer. At the moment, that play suggests pretty much any issue other than BAC stock.
The Case for Bank of America Stock
So the case for BAC stock does get a bit narrow here. To choose BAC over JPM or C or GS, an investor has to want some macro/big bank risk but not a lot. That investor gets a 2.3% dividend yield which is solid, but lower than that seen elsewhere in the market (or, currently, from ten-year Treasuries).
But “narrow” doesn’t mean “nonexistent.” And while I do believe the sell-off in financials has gone too far, I personally am not quite confident enough to take a bet on Citi or Wells Fargo or Barclays. There are real risks here in a bull market and a US economic recovery entering its tenth year.
That said, at these levels, Bank of America stock looks awfully attractive. CEO Brian Moynihan said on the Q3 call that expenses would stay flat for the next two years.
Barring a macroeconomic catastrophe, revenues are going to grow. Yet BAC is trading at 9x 2019 EPS estimates, and closer to 8x 2020 numbers (at least as they appear now). A price-to-book multiple of 1.1x is the lowest in nearly a year.
And lower risk isn’t a bad thing. It does suggest likely lower rewards for BAC stock in an uber-bullish scenario. It doesn’t mean no rewards, however.
In this market, lower risk and obvious rewards seems like a nice combination. And it leads me to stay bullish on Bank of America stock.
As of this writing, Vince Martin has no positions in any securities mentioned.